What I have been calling “linear programming models” in economics apparently have a different name, “Computable General Equilibrium” models. These are the ones that extend the guns vs butter idea you saw in Econ 101 to multiple commodities.
On a theoretical level, it is surprising that CGE modeling has become such a vibrant industry, since its underpinnings in general equilibrium theory have been systematically undermined over the past several decades. (1) CGE models use the technique of representative agents—vast numbers of households and firms are treated as if they were a single decision-making entity—when we now know that multiple agents cannot be modeled as if they were just one. (2) In particular, the Debreu-Sonnenschein-Mantel result demonstrates that full knowledge of all supply and demand relationships in an economy is not sufficient to predict the equilibrium the economy will arrive at when it is not there yet. (3) The behavioral assumptions of these models, typically resting on utility maximization or simple modifications of it, have been empirically falsified. (4) Production and utility functions are routinely chosen for their convexity properties, despite the widespread recognition that nonconvexities (that yield multiple equilibria) are rife. In short, if theory should inform practice, we shouldn’t be doing CGE.
Now for the challenge. As far as I know, there has never been a rigorous ex post evaluation of CGE models in practice, one that compares predicted to actual outcomes. Based on performance, is there any evidence that such models add value—that their predictions are any better than those derived from macro or sector-specific models, or even a random walk? Also, are CGE models employed by any private sector players who bet real money on the results, or is it only in academia and the public sector that CGE modeling is taken seriously?
If mainstream economists are claiming that all decision making should pass through them shouldn’t they make some effort to demonstrate that they know what they are talking about?
On the other hand maybe I should drop this pursuit. It may be too easy. Via Naked Capitalism an article called The Economist Has No Clothes, which in turn quotes an article of the same title in Scientific American by Robert Nadeau as follows:
But what is not widely known is that these now legendary economists—William Stanley Jevons, Léon Walras, Maria Edgeworth and Vilfredo Pareto—developed their theories by adapting equations from 19th-century physics that eventually became obsolete.
The strategy the economists used was as simple as it was absurd—they substituted economic variables for physical ones. Utility (a measure of economic well-being) took the place of energy; the sum of utility and expenditure replaced potential and kinetic energy. A number of well-known mathematicians and physicists told the economists that there was absolutely no basis for making these substitutions. But the economists ignored such criticisms and proceeded to claim that they had transformed their field of study into a rigorously mathematical scientific discipline.
These curious developments explain why the mathematical theories used by mainstream economists are predicated on the following unscientific assumptions:
- The market system is a closed circular flow between production and consumption, with no inlets or outlets.
- Natural resources exist in a domain that is separate and distinct from a closed market system, and the economic value of these resources can be determined only by the dynamics that operate within this system.
- The costs of damage to the external natural environment by economic activities must be treated as costs that lie outside the closed market system or as costs that cannot be included in the pricing mechanisms that operate within the system.
- The external resources of nature are largely inexhaustible, and those that are not can be replaced by other resources or by technologies that minimize the use of the exhaustible resources or that rely on other resources.
- There are no biophysical limits to the growth of market systems.
This theory can no longer be regarded as useful even in pragmatic or utilitarian terms.
The comments are fascinating. While there are a few cogent criticisms, many readers claim that Nadeau “knows nothing about economics” yet eschew making any contrary factual statements. Seems familiar somehow.
And thence to yet another critique of economics, this one from a University of Chicago Ph.D. in economics, and an erudite and witty writer as well: The Secret Sins of Economics by Dierdre McCloskey, no less than a masterpiece of essay writing.
I had a lingering suspicion that conventional economics might be useful, but it’s out of my system now, and am ready to start looking into alternatives.